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Presenting a live 90-minute webinar with interactive Q&A Structuring Equity Compensation for Partnerships and LLCs Navigating Capital and Profits Interests Plus Section 409A and Tax Consequences WEDNESDAY , MARCH 9, 2016 1pm Eastern |


  1. Presenting a live 90-minute webinar with interactive Q&A Structuring Equity Compensation for Partnerships and LLCs Navigating Capital and Profits Interests Plus Section 409A and Tax Consequences WEDNESDAY , MARCH 9, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Edward E. Bintz, Partner, Arnold & Porter , Washington, D.C. Brian J. O'Connor, Partner, Venable , Baltimore The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 . NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted.

  2. Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-258-2056 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. NOTE: If you are seeking CPE credit, you must listen via your computer — phone listening is no longer permitted. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

  3. Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you email that you will receive immediately following the program. For CPE credits, attendees must participate until the end of the Q&A session and respond to five prompts during the program plus a single verification code. In addition, you must confirm your participation by completing and submitting an Attendance Affirmation/Evaluation after the webinar and include the final verification code on the Affirmation of Attendance portion of the form. For additional information about continuing education, call us at 1-800-926-7926 ext. 35.

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  5. Structuring Equity Compensation for Partnerships and LLCs March 9, 2016  Edward E. Bintz (202) 942-5045 Edward.Bintz@aporter.com  Brian O’Connor (410) 244 -7863 bjoconnor@venable.com

  6. Overview – Discussion Topics  Partnerships and LLCs – Core Principles  Profits interests  Capital interests  Options  Phantom arrangements  Partner/employee status  Section 409A considerations  Corporate conversions 6

  7. Partnerships and LLCs – Core Principles  Classification Issues – LLCs generally taxed as partnerships unless elections are made to treat them as corporations  Consequences of Pass-through Tax Treatment – No entity level tax and income, gain, loss and deduction flow-through to entity owners regardless of distributions by the entity 7

  8. Partnerships and LLCs – Core Principles (cont.)  Allocation and Distribution Provisions – Section 704(b) safe harbor – Capital account maintenance – Book-ups – Liquidating or not liquidating with capital accounts – Treatment of partnership distributions – Differences between distributions made with regard to income and distributions made without regard to income 8

  9. Equity Compensation Alternatives – Profits Interests  What is a profits interest?  Case law – Diamond v. Com’r, 56 T.C. 530 (1971), aff’d, 492 F.2d 286 (7 th Cir. 1974). – GCM 36346 (July 25, 1977) – St. John v. U.S., 84-1, USTC ¶ 9158 (C.D. Ill 1983). – Kenroy Inc. v. Com’r , 47 T.C.M. 1749 (1984). – Campbell v. Com’r , 59 T.C.M. 236 (1990), aff’d in part and rev’d in part, 943 F.2d 815 (8 th Cir. 1991). 9

  10. Equity Compensation Alternatives – Profits Interests (cont.)  Rev. Proc. 93-27 – Provides guidance on what constitutes a profits interest and tax consequences associated with profits interests – Profits interest defined as an interest other than a capital interest. A capital interest is an interest that gives holder a share of proceeds if partnership’s assets sold at FMV and proceeds distributed in liquidation – If Rev. Proc. 93-27 applies, grant of profits interest not a taxable event for service provider or partnership • Applies if profits interest is granted to person for provision of services to (or for the benefit) of a partnership in partner capacity or in anticipation of being a partner 10

  11. Equity Compensation Alternatives – Profits Interests (cont.) – Does not apply if: • Profits interest relates to substantially certain stream of income from partnership assets (such as high grade debt security or net lease) • Profits interest is disposed of within two years • Profits interest is an LP interest in a publicly traded partnership – Modifications under proposed regulations addressing management fee waivers (80 Fed. Reg. No. 141 (July 23, 2015)) 11

  12. Equity Compensation Alternatives – Profits Interests (cont.)  Rev. Proc. 2001-43 – Provides guidance on treatment on profits interests subject to vesting requirements – Provides that Rev. Proc. 93-27 applies at the time of grant of a profits interest even if not vested if: • Service provider treated as owner of the partnership interest from the date of grant and takes into account allocations of income, loss, etc. in determining tax liability • Neither partnership nor partners claim a deduction upon grant or vesting of the profits interests  Distributions and Allocations prior to vesting. Alternatives include: – Participate on same basis as if vested – Participate in distributions but retained in separate account maintained by partnership until vested (at which point actually distributed). Tax distributions paid currently – No participation 12

  13. Equity Compensation Alternatives – Profits Interests (cont.)  83(b) elections  Importance of book-ups; valuations  Effect of forfeiture  Is it a profits interest or a bonus arrangement?  Current proposed regulations and other proposed guidance  Common structural approaches for profits interests  Carried interest legislation and the President’s budget 13

  14. Equity Compensation Alternatives – Capital Interests  What is a capital interest? – As of date of grant entitles holder to share of liquidation proceeds if partnership liquidated – Also entitles holder to share of future profits  Tax treatment of capital interests – Similar to tax consequences associated with compensatory transfers of stock – Service provider recognizes income equal to FMV value of interest at time vested (less any amount paid). Basis equal to income recognized – 83(b) elections – Partnership (and therefore partners) get compensation deduction equal to FMV included in service provider’s income (subject to Sections 162 and 212) 14

  15. Equity Compensation Alternatives – Capital Interests (cont.) – Capital shift issues – Valuation of capital interest – liquidation value or arm’s length sale price for capital interest – Effect of forfeiture  Is a “fill - up” a profits interest or a capital interest? 15

  16. Equity Compensation Alternatives – Options on Partnership and LLC Interests  Options to acquire capital interests – Similar to stock options – Upon exercise service provider and partnership have same tax treatment as grant of capital interest (taking into account payment of exercise price)  Options to acquire profits interests – No income to service provider at time of exercise and no deduction for partnership – Generally not attractive to service providers from economic perspective 16

  17. Equity Compensation Alternatives – Phantom Interests  Similar to phantom stock  Service provider recognizes ordinary income at time of payment  Partnership gets deduction equal to amount paid  Can be subject to Section 409A if not eligible for short-term deferral exception or other exceptions 17

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